SOLUTION COST AND MANAGEMENT ACCOUNTING MAY 2013

SOLUTION 1
(a)

Cost of material
Cost of labour
Variable production overheads
Fixed manufacturing overheads (reduction)
Redundancy cost
Purchases

Make
Component A
GHC
210,000
180,000
30,000
-___
420,000

Buy
Component A
GHC
(18,750)
5,000
585,000
571,250

Dolow should make component A at a relevant cost of GHC420,000 compared with cost of
purchases of GHC571,250.
Note: Both fixed manufacturing and shared common cost are left since it is common to both
except the reduction in manufacturing fixed cost of GHC18,750.
(b)

Contributions

Selling price per unit

Variable cost per unit
Contribution per unit

Make A
GHC
47
28
19

Buy A
GHC
47
39
8

Make Z
GHC
43
29
14

On the basis of the contribution, Dolow should buy A and use the available spare capacity to
produce Z giving a total contribution of 8 + 14 = 22 compared with contribution of producing
A at GHC19.
SOLUTION 2
(a)
Inflows
Receipts from sales
Outflows
Payment to suppliers
Rent
Salaries
Telephone
Delivery van
Other expenses

CASH BUDGET
1st Quarter
2nd Quarter

3rd Quarter

4th Quarter

18,000

66,000

110,000

150,000

54,400
1,350
900
250
12,000
250
69,150

52,800
900
250
250
54,200

88,000
1,350
900
250
250
90,750

120,000
900
250
250
121,400
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SOLUTION COST AND MANAGEMENT ACCOUNTING MAY 2013

Net cash flow
Opening cash balance
Closing cash balance

(b)

(51,150)
(4,200)
(46,950)

11,800
(46,950)
(35,150)

19,250
(35,150)
(15,900)

28,600
(15,900)
12,700

INCOME STATEMENT
GHC
Sales
Opening inventory
Purchases (80% x 444,000)
Closing inventory
Cost of sales
Gross profit (20% x 444,000)
Operating Expenses
Rent
Salaries
Telephone
Other expenses
Depreciation

40,000
355,200
395,200
(40,000)
(355,200)
88,800
2,700
3,600
1,000
1,000
1,600
(9,900)
78,900

Net profit

(c)

GHC
444,000

CASH & PROFIT RECONCILIATION

Opening cash balance

Closing cash balance
Net improvement
Add: Inventories
Receivables
Less: Payables
Depreciation

GHC
4,200
12,700
16,900
40,000
100,000
156,900
(80,000)
(1,600)
75,300

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SOLUTION COST AND MANAGEMENT ACCOUNTING MAY 2013

Workings
1)

Collections from Debtors

Month
_____

Sales
____

January
February
March
April
May
June
July
August
September
October
November
December

18,000
18,000
18,000
30,000
30,000
30,000
50,000
50,000
50,000
50,000
50,000
50,000

18,000
18,000
18,000
30,000
30,000
30,000
50,000
50,000
50,000
50,000

50,000
50,000

January
February

Monthly
Receipts

Quarterly
Receipts
18,000

66,000

110,000

150,000
Trade
Receivable

2)

Sales = 54,000 x 90,000 + 150,000 + 150,000 = 444,000

3)

Payments to Suppliers
Month
_____

Purchases
________

Monthly
Payments

December
January
February
March
April
May
June
July
August
September
October
November
December

40,000
14,400
14,400
14,400
24,000
24,000
24,000
40,000
40,000
40,000
40,000
40,000
40,000

40,000
14,400
14,400
14,400
24,000
24,000
24,000
40,000
40,000
40,000
40,000

54,400

40,000
40,000

Trade
Payable

January
February

4)

Quarterly
Payments

52,800

88,000

120,000

Purchases: 80% x 444,000 = 355,200

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SOLUTION COST AND MANAGEMENT ACCOUNTING MAY 2013

SOLUTION 3
(a)

Analysis of Change in Profit

Jan - June
Increase in sales
3,000,000
Decrease in direct materials
390,000
Decrease in direct labour
390,000
Decrease in direct expenses
260,000
Decrease in factory cost
Increase in stocks (opening)
Decrease in closing stock

July Dec.
3,750,000
225,000
225,000
150,000

Change
750,000
165,000
165,000
110,000
(440,000)
600,000
1,000,000
1,160,000
750,000
410,000

Profit (second half of the year)

Difference
The difference is as a result of stocks.
(b)

Profit and Loss Account

Marginal Costing
Sales
Less: Direct material
Direct labour
Variable man./overhead
Opening stock
Closing stock
Variable cost of sales
Contribution
Fixed cost

Jan. - June
3,000,000
390,000
390,000
260,000
1,040,000
240,000
1,280,000
480,000
800,000
2,200,000
1,620,000
580,000

July Dec.
3,750,000
225,000
225,000
150,000
600,000
480,000
1,080,000
80,000
1,000,000
2,750,000
1,620,000
1,130,000

Profit increased under marginal costing because fixed cost was fully charged as period
cost and not including the inventory.
(c)

Argument for Marginal Costing

1.
2.
3.

Marginal costing provides more information for decision making.

Variable costing removes from profit the effect of inventory changes.
Variable costing avoids fixed overheads being capitalized in unsalable stocks.

Argument for Absorption Costing

1.
2.

Absorption costing does not understate the importance of fixed cost.

Consistent with external reporting
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SOLUTION COST AND MANAGEMENT ACCOUNTING MAY 2013

3.

Absorption costing avoids fictitious losses being reported in the sense that
fixed overheads are referred by including it in unsold stock and matched
against subsequent revenue when goods are sold.

SOLUTION 4
(a)

Key Factor
This is a factor which is a binding constraint upon the organization preventing
indefinite expansion or unlimited profits.
Examples are: Lack of market (Sales), unavailability of finance, lack of skilled labour,
suppliers of materials or lack of space.

(b)

(i)

If labour hours is limited to 45,000 hours

Sales
Less:
Variable Cost
Contribution/Unit
Labour hours
Contribution per labour
Ranking

A
50

B
70

C
80

D
100

(18)
32
3
10.67
3rd

(40)
30
2
15
1st

(34)
46
7
6.57
4th

(34)
66
5
13.2
2nd

The appropriate mix:

3,000 units of B @ 2
3,000 units of D @ 5
3,000 units of A @ 3
2,142 units of C @ 7

(ii)

hours
hours
hours
hours

If material is limited to 90,000 kgs

A
GHC
Sales
50
Less:
Variable Cost
(18)
Contribution/Unit
32
Material kg
3
Contribution kg of material
10.67
Ranking
2nd

=
=
=
=

6,000 labour hours

15,000 labour hours
9,000 labour hours
15,000 labour hours
45,000 labour hours

B
GHC
70

C
GHC
80

D
GHC
100

(40)
30
9
3.33
4th

(34)
46
5
9.2
3rd

(34)
66
6
11
1st

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SOLUTION COST AND MANAGEMENT ACCOUNTING MAY 2013

The appropriate mix:
3,000 units of D @ 6 kg
3,000 units of A @ 3 kg
3,000 units of C @ 5 kg
1,444 units of B @ 9 kg

=
=
=
=

18,000 kg
9,000 kg
15,000 kg
13,000 kg
55,000 kg

(c)

The factors include the following:

Remuneration should reflect workers effort and performance and payment should be
made without delay, preferably very soon after completion of the task.
The scheme should be reasonably simple to assist administration and to enable
employees to calculate their own bonus.
Performance levels should be fair, ie they should be in the reach of the average worker
working reasonably hard.
There should be no artificial limit on earnings and earnings should be safeguarded
when problems arise outside the employees control.
The scheme should not be introduced until there has been full consultation ad
agreement with employees and unions.

SOLUTION 5
(a)

Process Costing and Job Costing A Comparison

Process Costing
1. Costs are compiled process-wise and
cost per unit is the average cost, ie the
total cost of the process divided by
the number of units.

Job Costing
Costs are separately ascertained for each job,
which is cost unit.

2. Production is of standardised
products and cost units are identical.

Production is of non-standard items with

specifications and instructions from the
customers.
Production is against orders from customers.
Costs are calculated when a job is completed.

3. Production is for stocks.

4. Costs are computed at the end of a
specific period.
5. The cost of one process is transferred
to the next process in the sequence.
6. On account of continuous nature of
production, work-in-progress in the
beginning and end of the accounting
period is a regular feature.
7. Cost control is comparatively easier.
This is because factory processes and
products are standardised.

Cost of a job is not transferred to another job

but to finished stock account.
There may or may not be work-in-progress
in the beginning and end of the accounting
period.
Cost control is comparatively more difficult
because each cost unit or job needs
individual attention.
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SOLUTION COST AND MANAGEMENT ACCOUNTING MAY 2013

(b)

(i)

Calculate EOQ
x = 2 x D x Co
CH
2 x 50,000 x 160
12
16,000,000
12
=
1154.7 units

OR
2 x 500,000 x 160
12
____________
160,000,000
= 12,649 units

(c) i. Transfer price is the value placed on items produced in a segment for further
processing in another segment or services rendered by one unit to another unit in the
same organisation.
ii. Market Based:
-

Market Price: where the product or service is produced in a competitive

environment ie the intermediate product/service can be sold outside and the
receiving division can also obtain the product from outside. The market price can
be used t set the price of the intermediate product.
Cost Based:
- Marginal Cost: where the product can not be sold outside the company can gain
when the supplying division can produce and transfer at marginal cost.
Negotiated Price:
- The receiving and supplying division can agree on prices that will satisfy the two
units.
Adjusted Market Price:
The supplying division can supply at marginal cost where there is competition but
there is idle capacity.
(c)

Standard Costing
It is a system of comparing actual results with expected results, the latter being based
ion predetermined standard costs per unit. Variances are calculated and analysed by
reasons.
Budgeting Control
Establishment of departmental budgets relating to the responsibilities of executives to
the requirements of policy and the continuous comparison of actual with budgeted
results.

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